OPEC published its most recent monthly report on Monday, indicating a significant drop in oil production—down 27% in March, as Iran threatened to obstruct the Strait of Hormuz.
Per the OPEC report, there was a decline of 7.88 million barrels per day (mb/d) in March. This decrease marks an even larger oil shock than the 6.98 million barrel per day dip experienced during the early days of the coronavirus pandemic in May 2020.
This decrease overshadows a 5% monthly interest rate. The production cuts recall the actions taken by OPEC in 1973, which were aimed at penalizing Israel’s allies following a series of conflicts in the Yom Kippur War. Those cuts caused a major fuel crisis in the U.S., which at that time was heavily reliant on OPEC oil.
Among OPEC nations, Iraq saw the steepest production drop in March, with a staggering 61% reduction, followed by Kuwait at 51% and the United Arab Emirates (UAE) at 45%.
Saudi Arabia experienced the largest absolute volumetric decline, losing about 2.31 million barrels per day. Yet, percentage-wise, the decline was less severe due to its generally higher production rates compared to others. Saudi Arabia managed to mitigate the impact by rerouting oil through a network of cross-border pipelines to Red Sea ports, avoiding significant blockage at the Strait of Hormuz.
This decline in production arrives at a pivotal moment, as some OPEC nations had recently started to ramp up production after voluntary cuts. There’s an expectation that oil prices will increase this year.
Interestingly, OPEC’s report refrained from directly addressing the ongoing tensions with Iran, instead referencing “geopolitical developments” that warrant close observation as contributing factors to the slowdown. The report tentatively suggests that, unless further crises arise, production could bounce back swiftly once the Strait of Hormuz reopens and recovery efforts for damages from Iranian missile attacks on Gulf oil infrastructure are undertaken.
Moreover, OPEC noted that global oil demand is likely to decline by around 500,000 barrels per day, attributing this to a “temporary slight slowdown in oil demand growth” amid recent happenings in the Middle East.
